European Union has endorsed loans to be lent to countries in distress from the European Stability Mechanism, a bailout fund set up during the debt crisis a decade ago with lending assets of about 410 billion euros ($444 billion).
In a joint statement by finance ministers from 19 European countries, only partners who use euro currency can borrow up to 2% of their gross domestic product provided it is used against COVID-19.
“Proposals should take into account the unprecedented nature of the COVID-19 shock affecting all our countries.”
This comes on the backdrop of a request made by a group of nine European nations wanting the immediate rollout of “coronabonds.” “Coronabonds” are shared debt backed by all euro zone countries which would enable hardest-hit countries borrow at sustainably low interest rates as their expenditure on hospitals and measures to stop businesses going bankrupt.
The agreement was made during a conference held via online for about six hours. The leaders further called on the EU’s powerful executive arm, the European Commission, to draw up a strategy to save their choked economies once lockdowns and other health measures are lifted.
Speaking at the summit, EU Council President, Charles Michel encouraged EU zone finance ministers to work harder in this crisis.
“This crisis is exceptional and unique and requires a very strong answer. Euro zone finance ministers will have to continue working and make proposals on tools within two weeks."
However, countries like Germany and the Netherlands have long objected to common borrowing because of the risk it leaves them, the reduction in incentives for other countries and the rate at which it controls their deficits.
Nonetheless while the leaders all acknowledge the extent of the crisis and the need to support Italy in particular, they are divided over whether to use every economic tool at their disposal now or keep something in reserve should a second wave of infections start.
As governments wrestle over shared borrowing, the European Central Bank stepped up its efforts to bolster the economy. The central bank dropped a longstanding limit on its bond purchase stimulus. This was made known in an announcement last week saying, “750 billion-euro pandemic emergency purchase program is in place to support hard-pressed countries like Italy.”
In the joint statement, the leaders acknowledged that Europe needs a plan to be able to return to normal after everything.
“Europe must start to prepare the measures necessary to get back to a normal functioning of our societies and economies and to sustainable growth. The plan must include a coordinated exit strategy, a comprehensive recovery plan and unprecedented investment.”
The coronavirus crisis comes just nine months before the EU’s long-term budget expires. However, talks on the next seven-year spending plan are in a deadlock because a small group of countries, led by the Netherlands, are refusing to contribute more money to fill the gap left by the departure of Britain.
European Commission President, Ursula von der Leyen, has said her office and agencies stand ready to support the EU's 27 member countries with every tool at her disposal.
“But we must be very clear, we are in the final year of a seven-year budget. This crisis shows how important, indeed crucial, it is to have a budget that can deal with complex crises such as this one.”
As the virus has taken hold, the Commission has permitted unprecedented border and economic measures so that embattled member countries like Italy and Spain, can save supply chains and businesses.